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Posts Tagged ‘NYR’

There is a new German question. It is this: Can Europe’s most powerful country lead the way in building both a sustainable, internationally competitive eurozone and a strong, internationally credible European Union?Germany’s difficulties in responding convincingly to this challenge are partly the result of earlier German questions and the solutions found to them. Yesterday’s answers have sown the seeds of today’s question.

Before I explore those historical connections, however, let us reflect on everything that this new German question is not. Twenty-three years after unification, the enlarged Federal Republic of Germany is about as solid a bourgeois liberal democracy as you can find on earth. It has not only absorbed the huge costs of unification but also, since 2003, made impressive economic reforms, lowering labor costs by consensus and hence restoring its global competitiveness.

This land is civilized, free, prosperous, law-abiding, moderate, and cautious. Its many virtues might be summarized as “the banality of the good.” Asked by the tabloid BILD-Zeitung what feelings Germany awakes in her, Angela Merkel once famously replied, “I think of well-sealed windows! No other country can make such well-sealed and nice windows [dichte und schöne Fenster].”1 Yet the place is not altogether so banal. Opening the well-sealed windows of my hotel room in Berlin, I look across Unter den Linden to the illuminated, translucent dome of the Reichstag building, at the heart of what is now, after London, Europe’s most exciting city.2 Den Rest des Beitrags lesen »

The gloves are off in the roiling academic dispute over the merits of austerity and the dangers of debt.

In the latest round, Harvard economists Kenneth Rogoff and Carmen Reinhart accused Princeton economist and New York Times columnist Paul Krugman of “spectacularly uncivil behavior” and the inaccurate allegation that they refused to share data supporting their work linking heavy debt levels to subsequent slow economic growth.

Papers such as Mr. Rogoff and Ms. Reinhart’s, which warn of the perils of too much government debt, “haven’t just lost their canonized status, they’ve become the objects of much ridicule,” Mr. Krugman wrote in a recent New York Review of Books attack on advocates of austerity.

“Despite their paper’s influence, Reinhart and Rogoff had not made their data widely available—and researchers working with seemingly comparable data hadn’t been able to reproduce their results,” Mr. Krugman wrote.

Mr. Rogoff and Ms. Reinhart responded Sunday in a five-page letter and a four-page appendix to Mr. Krugman, posted on their website:

“We admire your past scholarly work, which influences us to this day. So it has been with deep disappointment that we have experienced your spectacularly uncivil behavior the past few weeks,” the letter said. “You have attacked us in very personal terms, virtually nonstop, in your New York Times column and blog posts. Now you have doubled down in the New York Review of Books, adding the accusation we didn’t share our data.” Den Rest des Beitrags lesen »

In normal times, an arithmetic mistake in an economics paper would be a complete nonevent as far as the wider world was concerned. But in April 2013, the discovery of such a mistake—actually, a coding error in a spreadsheet, coupled with several other flaws in the analysis—not only became the talk of the economics profession, but made headlines. Looking back, we might even conclude that it changed the course of policy.

Why? Because the paper in question, “Growth in a Time of Debt,” by the Harvard economists Carmen Reinhart and Kenneth Rogoff, had acquired touchstone status in the debate over economic policy. Ever since the paper was first circulated, austerians—advocates of fiscal austerity, of immediate sharp cuts in government spending—had cited its alleged findings to defend their position and attack their critics. Again and again, suggestions that, as John Maynard Keynes once argued, “the boom, not the slump, is the right time for austerity”—that cuts should wait until economies were stronger—were met with declarations that Reinhart and Rogoff had shown that waiting would be disastrous, that economies fall off a cliff once government debt exceeds 90 percent of GDP. Den Rest des Beitrags lesen »

In a fast-moving situation, significant changes have occurred since this article went to press. On August 1, as I write below, Bundesbank President Jens Weidmann objected to the assertion by Mario Draghi, the president of the European Central Bank, that the ECB will “do whatever it takes to preserve the euro as a stable currency.” Weidmann emphasized the statutory limitation on the powers of the ECB. Since this article was published, however, it has become clear that Chancellor Merkel has sided with Draghi, leaving Weidmann isolated on the board of the ECB.

This was a game-changing event. It committed Germany to the preservation of the euro. President Draghi has taken full advantage of this opportunity. He promised unlimited purchases of the government bonds of debtor countries up to three years in maturity provided they reached an agreement with the European Financial Stability Facility and put themselves under the supervision of the Troika—the executive committee of the European Union, the European Central Bank, and the International Monetary Fund.

The euro crisis has entered a new phase. The continued survival of the euro is assured but the future shape of the European Union will be determined by the political decisions the member states will have to take during the next year or so. The alternatives are extensively analyzed in the article that follows.

—September 7, 2012

I have been a fervent supporter of the European Union as the embodiment of an open society—a voluntary association of equal states that surrendered part of their sovereignty for the common good. The euro crisis is now turning the European Union into something fundamentally different. The member countries are divided into two classes—creditors and debtors—with the creditors in charge, Germany foremost among them. Under current policies debtor countries pay substantial risk premiums for financing their government debt, and this is reflected in the cost of financing in general. This has pushed the debtor countries into depression and put them at a substantial competitive disadvantage that threatens to become permanent.

This is the result not of a deliberate plan but of a series of policy mistakes that started when the euro was introduced. It was general knowledge that the euro was an incomplete currency—it had a central bank but did not have a treasury. But member countries did not realize that by giving up the right to print their own money they exposed themselves to the risk of default. Financial markets realized it only at the onset of the Greek crisis. The financial authorities did not understand the problem, let alone see a solution. So they tried to buy time. But instead of improving, the situation deteriorated. This was entirely due to the lack of understanding and the lack of unity. Den Rest des Beitrags lesen »

The euro crisis is a direct consequence of the crash of 2008. When Lehman Brothers failed, the entire financial system started to collapse and had to be put on artificial life support. This took the form of substituting the sovereign credit of governments for the bank and other credit that had collapsed. At a memorable meeting of European finance ministers in November 2008, they guaranteed that no other financial institutions that are important to the workings of the financial system would be allowed to fail, and their example was followed by the United States. Den Rest des Beitrags lesen »

Audience members at the ceremony for ‘the sixtieth anniversary of the liberation of Tibet,’ Lhasa, July 19, 2011

Much of the talk about Vice President Joe Biden’s four-day visit to China last week centered on the man who hosted him: Xi Jinping, expected to become the country’s next president in 2012. Biden’s office has said that the principal purposes of his visit were “to build a relationship with Vice-President Xi” and “to get to know China’s future leadership.” But working out the thinking of China’s leaders has always been extremely difficult, and Xi is no exception. Den Rest des Beitrags lesen »

In the winter of 2008–2009, the world economy was on the brink. Stock markets plunged, credit markets froze, and banks failed in a mass contagion that spread from the US to Europe and threatened to engulf the rest of the world. During the darkest days of crisis, the United States was losing 700,000 jobs a month, and world trade was shrinking faster than it did during the first year of the Great Depression. Den Rest des Beitrags lesen »

The financial reregulation package just passed by Congress is far from a comprehensive reform of American finance. Despite the enormous threat to the world’s financial markets created by the failure of Lehman Brothers and the stunning excesses of insurance giant AIG and banking conglomerate Citigroup, the reforms are in truth modest. Neither the Obama administration nor Congress opted to cut banks down to size, and the bill is only placing mild limits on risky banking activities. The giant financial institutions, meanwhile, are as big—even bigger—than ever and bankers’ compensation is once again at stunning levels. Den Rest des Beitrags lesen »

“European Monetary Union—The Movie” would have to begin with the following scene. The place is the library of the Elysée Palace, the time is about March 1990. Only three people are present: François Mitterrand, the French president; Helmut Kohl, the chancellor of soon-to-be reunited Germany; finally, since neither speaks the language of the other, a faceless interpreter sworn to silence.

Mitterrand is in a melancholy mood. During the last few months, ever since the collapse of the Berlin Wall in November 1989, he has tried every conceivable diplomatic strategem to stop, or at least brake, the quickening pace of German reunification. But to no avail. Glumly, he stares into the fireplace, as his friend Helmut talks. “Look, François, this time it won’t be like Versailles in 1871, when Paris was encircled by German armies, when the new Reich was proclaimed on the ruins of French pride. We have Franco-German friendship, we have the European Union, our forces are completely integrated in NATO; indeed, we don’t even have our own general staff any more.” Den Rest des Beitrags lesen »

Natalie Behring/ReutersGoldman Sachs CEO Lloyd Blankfein at a speech by President Barack Obama on financial regulation, New York City, April 22, 2010

Not the least striking revelation of Michael Lewis’s excellent book, The Big Short, is that this author of financial best-sellers has changed his mind. In a column for Bloomberg News in early 2007, he praised the rapidly expanding market for derivatives. Visiting the annual meeting of financiers and policymakers at the World Economic Forum in Davos, Switzerland, that year, he was exasperated by the fears of some of the participants. “None of them seemed to understand that when you create a derivative you don’t add to the sum total of risk in the financial world,” he wrote, sounding arguments very similar to those made by Alan Greenspan. “You merely create a means for redistributing that risk. They have no evidence that financial risk is being redistributed in ways we should all worry about.”

As we now know, derivatives were the instruments that enabled Wall Street to stretch capital dangerously far—and were at the center of the financial crisis that began that year. They are investment contracts between two parties based on other securities, which require little capital up-front, enabling buyers and sellers to take temporary large investment stakes inexpensively, including in mortgage securities. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Greenspan told Congress in 2003. Lewis wrote in 2007: “The most striking thing about the growing derivatives markets is the stability that has come with them.” Den Rest des Beitrags lesen »